Retail SMART

The Art of Buying - Fewer Manufacturers
 

By: Dennis A. Conforto
Chairman & CEO of A-Z Media Group, Inc.


For the month of July I will be writing about “The Art of Buying”. For a retailer, buying the right product at the right time for the right price is the essence of good retailing. However, many retailers make the mistake of buying from too many manufacturers. When I visit scrapbooking stores and look at their Accounts Payable listings, I usually find at least 300 vendors in the record file.

Somehow retailers have come to believe that the combination of more vendors and more selection means more business. This is simply not the case. Rather, retailers and manufacturers should form strong relationships.

The proper business model for profit is quite simple. The trick is in the implementation.

Let’s start with the manufacturer. Manufacturers would rather sell more products to fewer retailers. The reason: they will make more money. Most manufacturers in the scrapbooking industry do 80% of their business with only 20% of their client base. To illustrate this, let’s say a typical manufacturer has 1,500 retail stores to which they sell their products. Let’s also say that 80% of the business volume comes from 300 retail stores. This would mean they would have 1,200 retail stores who do hardly any volume with them. It is a lot of extra work for the manufacturer with little reward.

Well what would happen to the 300 stores if I worked those accounts harder, provided more services, did more branding, and managed more of the supply chain process? Chances are I could increase my sales to those 300 stores by 50%. If I were a manufacturer today I would choose to do more business with fewer retailers.

To increase my business with these 300 stores, I would create a partnership that would include co-op advertising funds, display co-op funds, and volume discount programs. I would create “quick ship” programs and take products that did not sell back and provide on the spot discount programs to help them move the products out the door. I would also partner with retailers to achieve a certain level of market protection so that 95% of the scrapbooking consumers in the U.S. market were at least within 45 minutes of a store that carried my products. And I would be working my branding within each of my partner stores.

Now if I were a retailer, I would only do business with this type of manufacturer: one that really knows how to partner with me, and is really interested in increasing my retail volume. Of course, if all my manufacturers did that then I would go from 300 manufacturers to about 50. As a direct result, I would go from losing money or breaking even to making 8% to 10% pre-tax profits.

Instead of the retailer working alone to increase volume, 50 companies would be helping my business succeed day in and day out. Today’s giant retailers understand how to make these manufacturing partnerships work for them. The question is, do these same principles hold true for the small independent retailers? And the answer is yes they do.

If I was shopping the CHA summer show in Chicago next week I would be shopping not for product first, but for true partnerships. And that is what being Business SMART is all about.